Zero Based Vs. Activity Based Budgeting

Zero Based Budgeting and Activity-Based Budgeting are the most popular budgeting methods. The selection of preferred budgeting method depends on the functioning and suitability to an organization. Before understanding the differences, let’s go through the meaning of these methods.

Meaning of Zero Based and Activity Based Budgeting

Zero-based budgeting method starts right from the scratch. Current year’s budgets are prepared without considering the previous year’s budgets. The expenses incurred in each year must be justified. The vitality of projects determines the resource allocation. The aspect which is critical for the survival of business and yields more profits gets the first priority.

Activity-based budgeting uses an activity-based costing methodology to prepare the budgets. It does not consider past year’s budgets to prepare current year’s budget. Here, the budget is prepared after conducting the study of activities that incur the cost. The outcome of this research determines the resource allocation.

Zero Based Vs. Activity Based Budgeting

Following points highlight the points of difference between zero-based budgeting and activity-based budgeting.

Basis for Budget Preparation

Zero-based budgets are prepared right from the beginning, without considering last year’s budget. This method of budgeting allocates resources based on needs and costs of the department. On the other hand, activity based budgeting also do not consider last year’s budget, but the resources are allocated based on the efficiencies in business operations.

Resource Allocation

In zero-based budgeting, the ranking of activities of the business is on the basis of their vitality. Only after the expenses incurred are justified, resources allocation happens towards an activity. On the other hand, in the case of activity-based budgeting, after justifying the cost drivers, the departments allocate the resources.

Wasteful Expenses

Zero-based budgeting reconsiders all the activities of the business every year and allocates money only to those activities which justify the expense. Hence, eliminating the unnecessary activities results in cost saving. In activity-based budgeting, each function of the business is analyzed keeping in view the functions and goals of business. It eliminates those functions that do not go well with any other function. Hence, it leads to further cost saving.

Link to Business Objectives

In zero-based budgeting, revaluation of the programs is done. That becomes the base for resource allocation. On the other hand, activity based budgeting allocates resources after recording the relationship of business functions with the business objectives.

Potential Profitability

Zero-based budgeting is based on justification given for each expense related to an activity. It does not lead to determining the potential profitability of the business. Whereas, activity based budgeting aligns the business activities with the goals. This helps to know the potential profitability.

About The Author

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

One Response

tejal

each concept is very well explained in detail as well as in simple language, n point wise

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